EBay Board Rules May Stymie Icahn PayPal Spinoff

Activist investor Carl Icahn faces a long haul in getting enough board support to push through his hopes of getting eBay to spin off PayPal.

EBay (EBAY) surprised Wall Street on Wednesday with news that Icahn had taken a 0.82% stake in the payments and e-commerce giant and has proposed that it spin off its lucrative PayPal payments unit into a separate company.

The veteran corporate raider, who has grabbed stakes and pushed for changes at other tech companies such as Apple (AAPL) and Yahoo (YHOO), also nominated two of his employees to serve on eBay's board.

Activist investor Carl Icahn aims to get two employees elected to eBay's board, a tough task that would still leave him short in his PayPal push. AP View Enlarged Image

EBay's structure, though, makes it hard for Icahn to get enough allies on the board, says Susquehanna Financial Group.

The current eBay board has rejected Icahn's spinoff proposal.

EBay CEO John Donahoe characterized the spinoff as an "old idea" in a conference call with analysts on Wednesday, when the company also released Q4 earnings.

While four of eBay's 11 board seats are up for election this year, the nominations deadline was Jan. 18, says Susquehanna analyst King She.

Only 4 Seats Up For Election

Icahn, according to She in a research report last week, met the deadline with his two nominations, but even if the two are elected at the annual shareholders meeting, expected in mid-April, it will be another year before Icahn could get any more directors aboard.

"The way the board is structured, the best-case scenario is that (Icahn) can only get two of the 11 board seats this year," Susquehanna analyst Brian Nowak, who works with She, told IBD. "This means that in order to do a PayPal spinoff in 2014, he would have to convince the board members and management to change the way they've been thinking about (the) business." That, says Nowak, is very unlikely.

But Icahn, who heads diversified holding company Icahn Enterprises, could have better luck next year, says the investment bank. That's because all 11 board seats are up for re-election in 2015, it says.

Icahn by then also could have boosted his stake in eBay and rallied other investors to his idea.

Susquehanna's She points out that eBay's certificate of incorporation lets shareholders call special meetings to discuss issues like a spinoff, but only if the shareholders have held at least a 25% stake for at least 30 days.

Icahn could use this route to bring the issue of a PayPal spinoff to a head, but She notes it could be a very expensive proposition for Icahn. Such a 25% position in eBay would cost Icahn and any investor allies he is able to bring aboard about $18 billion, based on the current price of eBay shares, according to She.

Activist investor Carl Icahn faces a long haul in getting enough board support to push through his hopes of getting eBay to spin off PayPal.

EBay (EBAY) surprised Wall Street on Wednesday with news that Icahn had taken a 0.82% stake in the payments and e-commerce giant and has proposed that it spin off its lucrative PayPal payments unit into a separate company.

The veteran corporate raider, who has grabbed stakes and pushed for changes at other tech companies such as Apple (AAPL) and Yahoo (YHOO), also nominated two of his employees to serve on eBay's board.

Activist investor Carl Icahn aims to get two employees elected to eBay's board, a tough task that would still leave him short in his PayPal push. AP View Enlarged Image

EBay's structure, though, makes it hard for Icahn to get enough allies on the board, says Susquehanna Financial Group.

The current eBay board has rejected Icahn's spinoff proposal.

EBay CEO John Donahoe characterized the spinoff as an "old idea" in a conference call with analysts on Wednesday, when the company also released Q4 earnings.

While four of eBay's 11 board seats are up for election this year, the nominations deadline was Jan. 18, says Susquehanna analyst King She.

Only 4 Seats Up For Election

Icahn, according to She in a research report last week, met the deadline with his two nominations, but even if the two are elected at the annual shareholders meeting, expected in mid-April, it will be another year before Icahn could get any more directors aboard.

"The way the board is structured, the best-case scenario is that (Icahn) can only get two of the 11 board seats this year," Susquehanna analyst Brian Nowak, who works with She, told IBD. "This means that in order to do a PayPal spinoff in 2014, he would have to convince the board members and management to change the way they've been thinking about (the) business." That, says Nowak, is very unlikely.

But Icahn, who heads diversified holding company Icahn Enterprises, could have better luck next year, says the investment bank. That's because all 11 board seats are up for re-election in 2015, it says.

Icahn by then also could have boosted his stake in eBay and rallied other investors to his idea.

Susquehanna's She points out that eBay's certificate of incorporation lets shareholders call special meetings to discuss issues like a spinoff, but only if the shareholders have held at least a 25% stake for at least 30 days.

Icahn could use this route to bring the issue of a PayPal spinoff to a head, but She notes it could be a very expensive proposition for Icahn. Such a 25% position in eBay would cost Icahn and any investor allies he is able to bring aboard about $18 billion, based on the current price of eBay shares, according to She.

Under shareholder action by written consent, shareholders have the right — except as otherwise provided in a company's certificate of incorporation — to take any action that might also be taken at any annual or special meeting of such shareholders, without holding such a meeting.

They can do this without prior notice and without a vote, if voting shareholders have consented in writing.

In any case, analyst Nowak says, eBay can't afford to separate PayPal from its marketplaces, mobile and other e-commerce offerings without undermining its push into online and offline e-commerce. PayPal is the payments glue that holds everything together, he says.

ITG Internet analyst Steven Weinstein also sides with eBay's board on the wisdom of not spinning off PayPal.

"If you look at management's long-term direction for eBay, it involves an integrated approach to omni-channel e-commerce," Weinstein said. "Incorporating a strong payment mechanism is key, and eBay's built a lot of PayPal's functionality around that. To (separate) PayPal from eBay would ruin that long-term strategy."

More Than 40% Of Revenue

PayPal is a key source of revenue for eBay, helping to underpin the value of eBay shares. It accounted for $6.6 billion of eBay's total revenue of $16.05 billion in revenue in 2013, or 41%.

PayPal could be worth as much as $40 billion as a separate company, analysts have speculated. EBay's current market value is near $70 billion.

Icahn's next moves are still unclear. A Reuters story on Friday quoted "a source close to the matter" as saying that Icahn's stake stood closer to 2%, rather than 0.82%.

Still, most analysts seem to agree that he needs much more time and effort to force a showdown with eBay's board.

Icahn told the Wall Street Journal in an interview published Thursday that he's digging in for a proxy fight to win his two nominees seats on eBay's board.

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